(February 2012)
INTRODUCTION
Most Insurance Service Office (ISO) commercial lines policy require attaching IL 00 17–Common Policy Conditions. It contains six conditions:
A. Cancellation
B. Changes
C. Examination
D. Inspection and Surveys
E. Premium
F. Transfer of Your Rights and Duties under This Policy
A. CANCELLATION
This condition explains how cancellations are handled. Many states require using a mandatory state form in place of this cancellation condition but this is a good starting place.
The first named insured is the only that can cancel on behalf of the insured. The only thing that must be done is to mail or deliver the policy to the insurance company before the actual date of cancellation.
Example: Jade's policy runs from 01/01/11 to 01/01/12.
• Scenario 1: Jade decides to merge her business with another on 05/01/11. She sends her policy to her agent on 04/15/11 and requests that the policy be cancelled as of 05/01/11. Cancellation will be effective on 05/01/11.
• Scenario 2: Jade decides that she does not like this coverage, sends the policy back to her agent on 04/15/11, and requests that it be cancelled as of 03/01/11. In this scenario, cancellation will not be effective on 03/01/11. The cancellation date will not be earlier than the date the insurance company receives the request. |
The insurance company can cancel by mailing (or delivering) a written notice to the first named insured at its last known address. The notice must be either mailed or delivered at least 10 days prior to the cancellation date when the reason for cancellation is nonpayment of premium. The named insured must receive at least 30 days notice if the cancellation is for any other reason. This notice must clearly state the date of cancellation because it becomes the policy period's end date.
Example: Faith and Fidelity Insurance Company mails a notice of cancellation to Problem Insured on 04/15/11 to be effective on 05/01/11.
• Scenario 1: The reason for cancellation is nonpayment of premium. The cancellation is effective 05/01/11.
• Scenario 2: The reason for cancellation is uncooperative spirit. The cancellation cannot go into effect because the notice period is too short. The policy continues in force.
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The first named insured receives a return premium when the policy is cancelled. The return premium must be pro rata of the policy premium when the insurance company cancels. However, the return premium may be less than pro rata when the first named insured requests cancellation.
Note: The short-rate penalty is not mandatory but it is a possibility.
The cancellation is in effect even if the insured did not receive the return premium.
Proof that notice of cancellation was mailed is all that is needed to effect cancellation. Proof that the first named insured actually received the notice is not required.
Related Court Cases:
Cancellation Held Not Effective When Notice Addressed
Cancellation Validated By Proof Mailing Of Notice
Cancellation Notice To Address Of Record Held Valid
Was Cancellation Notice Timely?
B. CHANGES
The policy that the insurance company issues represents the agreement it makes with the named insured. If the first named insured requests a change, the insurance company has the right to accept or reject the request. An endorsement that amends, waives, or changes any part of the policy must be attached to the policy.
Example: Fergus Farms wants to add a new operation to its policy. It sends an email to its agent and promptly forgets about it. A building that is part of the new operation is damaged six months later. Fergus sends a claim notice to the insurance company. The company denies the claim because it denies knowing anything about the new operation. The company also notes that an endorsement was not issued and a premium was not charged. |
C. EXAMINATION OF YOUR BOOKS AND RECORDS
The insurance company has the right to review the named insured's books and records (but only those that relate to the policy). This right extends throughout the policy term and for up to three years after.
D. INSPECTIONS AND SURVEYS
The insurance company has the right to make inspections and/or conduct surveys. It then may also provide reports and recommendations to the named insured.
This right is intended to benefit the insurance company. The inspections and surveys are not intended to be safety inspections for the benefit of third parties or employees. They should not be viewed as either a warranty or a representation that the named insured complies with any safety or health codes.
This condition applies to the insurance company that provides coverage as well as to any rating advisory organization. The only exception is when the insurance company agrees to provide mandatory boiler, pressure vessel, or elevator inspections.
Example: Grandley Insurance Company insures Toggle Enterprises. Grandley inspects the premises and submits five different recommendations to Toggle. Toggle does not comply with any of them. Maria is injured because of a condition that Grandley identified in the inspection and submitted to Toggle. She sues both Toggle (for her injury) and Grandley (because it knew about the condition but did not force Toggle to comply with it). Grandley can use this condition to defend itself against Maria's claim. |
E. PREMIUMS
The first named insured is the party that pays the premiums and receives all return premiums.
Example: John Smith, Mary Smith, Roger Lyons, and Felicia Brown are the named insureds on the policy issued by Metropolis Insurance Company. John collects $1,500 each from the other named insureds and pays the $6,000 policy premium. The insurance company cancels the policy mid-term and returns $3,000 to John. He keeps the money. Mary, Roger, and Felicia do not have any recourse against Metropolis for their portion of the premium that was returned. |
F. TRANSFER OF YOUR RIGHTS AND DUTIES UNDER THIS POLICY
The named insured does not have the option to transfer its rights and duties under the policy to anyone.
There is one exception that applies when the named insured is an individual. The named insured's rights and duties transfer to his or her legal representative when he or she dies. This transfer is limited because such representative has such rights and duties only when operating in the capacity of the named insured's legal representative. This means that the legal representative is not covered for any actions outside that capacity.
Example: Paul is the named insured. He named Jim as his legal representative if he dies. Paul dies. Jim continues to operate Paul's business in order to maintain its value until it can be sold.
• Scenario 1: The business and Jim are sued. Jim is covered because he is operating in his role as Paul's legal representative.
• Scenario 2: Jim is sued because a child is injured at his home. There is no coverage because the injury is not related to Jim's role as Paul's legal representative.
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CP 00 90–COMMERCIAL PROPERTY CONDITIONS FORM ANALYSIS
(February 2012)
BACKGROUND
CP 00 90–Commercial Property Conditions contains nine conditions that apply to the Commercial Property Program. These are in addition to IL 00 17–Common Policy Conditions and the Loss Conditions and Additional Conditions in the specific Commercial Property Coverage Form.
Related Article: IL 00 17–Common Policy Conditions Analysis
The conditions are:
• Concealment, Misrepresentation, or Fraud
• Control of Property
• Insurance Under Two or More Coverages
• Legal Action against Us
• Liberalization
• No Benefit to Bailee
• Other Insurance
• Policy Period, Coverage Territory
• Transfer of the Rights of Recovery against Others to Us
A. CONCEALMENT, MISREPRESENTATION, OR FRAUD
Coverage is void if the named insured fraudulently or intentionally conceals or misrepresents any kind of material fact with respect to any of the following:
• The coverage part
• Covered property
• The named insured's interest in the insured property
• A claim under the coverage form
This section of the form deserves careful attention. Each state has its own philosophy with respect to the actions it considers concealment, misrepresentation, or fraud. Similarly, each state has laws or precedents that establish when an insurance company may or may not void, cancel, or suspend a coverage form or policy. As a result, a coverage review is not complete without analyzing the state specific endorsements attached to the coverage form or policy.
B. CONTROL OF PROPERTY
Only the named insured's negligence (or its negligent acts) affects the coverage provided. Coverage is not affected by negligent acts or neglect of other parties that are outside the named insured's direction and control.
This condition emphasizes the fact that the insurance company cannot deny coverage for the negligent acts of parties other than the named insured or deny coverage because of situations beyond the named insured's control. The company must always be fair and have a legitimate basis to deny a claim.
If an act, neglect or breach occurs at one location, only that location is impacted. A named insured that is negligent at one location may not be negligent at its other locations.
Example: Paul Flybynight has a commercial property policy that covers three furniture outlets. Two of them are on opposite sides of a mega-mall that has significant customer traffic. A severe storm strikes the part of town where the mall is located. Both of Paul's stores are seriously damaged by windborne debris, the display windows at each are blown out, and each store's interior sustains damage. Paul instructs his employees to secure location one. This includes boarding up windows and bringing in large fans to help dry things out. For reasons unknown, Paul does absolutely nothing at the other store. His staff at that location goes home and does not do anything except lower and lock the store's security gates. Meanwhile, the wind and rain cause tremendous damage to the store. Paul's insurance company makes a complete settlement for the damage at the one store but successfully denies the claim at the other store because Paul was negligent in attending to the damage. |
C. INSURANCE UNDER TWO OR MORE COVERAGES
Two or more coverages within a coverage form may apply to the same loss or damage. However, the insurance company is not liable for more than the actual amount of the loss or damage. This condition is important because it points out that insurance is a contract of indemnity. It is intended to protect the insured's assets. It is not a license to profit from an accidental or intentional loss.
Example: Patty's commercial property policy covers her building and business personal property. A fire damages a refrigeration unit. Patty reads her policy and decides to file a claim under both coverages because she realizes that the refrigeration unit could qualify as either building or personal property. She is paid the full value of the refrigeration unit and nothing more. |
D. LEGAL ACTION AGAINST US
Any legal action against the insurance company must be brought within two years after the date of loss or damage. Purchasing insurance coverage does not relieve the insured of its obligations and responsibilities. It must act responsibly and protect undamaged property after a loss, as well as cooperate fully with the carrier to establish a legitimate amount of loss.
This condition states that the no one can take legal action against the insurance company unless all reasonable duties and responsibilities required have been performed. One condition would be handling disputes over loss amounts using the appraisal condition instead of taking legal action against the company.
This condition is designed to preserve the right to a legal remedy in court while ensuring that doing so is a last resort.
E. LIBERALIZATION
The insurance company may adopt a revision to this coverage form that broadens coverage without charging an additional premium within 45 days prior to (or during) the policy period. If it does, the broadened coverage automatically applies to this coverage form.
This condition is meant to provide the insured with the full benefit of coverage upgrades the insurance company makes to the coverage form. One reason it is important is that many carriers begin to review and process renewal policies well in advance of the expiration date. This is to reduce expenses, increase efficiency, and comply with state non-renewal laws. As a result, the insured may not receive the most current policy upgrade, even if it becomes effective for that renewal. This condition permits the broader coverage to apply automatically (as long as a premium charge does not accompany it) and eliminates the company's expenses to subsequently endorse the renewal policy.
However, the opposite is not true. Changes in the new or upgraded version that reduce coverage do not automatically apply. In addition, enhancements or upgrades that would have been offered with an additional premium charge are not automatically included.
F. NO BENEFIT TO BAILEE
The insured is the only party that benefits from this insurance, even if another party has custody of covered property. Loss payments made to the insured are for only its financial interest in the covered property. There is no coverage for the time, labor, loss of use, or other potential loss that any other party that has custody of the property experiences.
There are two primary reasons for this provision:
• Every entity that has property at risk must be responsible for protecting that property.
• Commercial property coverage pricing is based on covering only eligible property as the coverage form or policies outlines and defines.
This condition enforces the coverage form's intended coverage and related pricing issues.
G. OTHER INSURANCE
This condition explains how to determine coverage or handle losses when other insurance coverage is available.
1. If the insured has other insurance subject to the same plan, terms, conditions, and provisions as this coverage form, the loss is shared on a proportionate basis. The insurance company's share is based on the proportion of its limit to the total limits of all insurance that covers the property on the same basis.
Example: A coin laundry that burns to the ground is insured by two commercial property policies issued by two different insurance companies. Both policies are written on the same basis and have identical limits. In this case, each carrier is responsible for half of the loss. |
2. If any other insurance that applies to a covered loss is other than as described above, this insurance applies on only an excess basis. This coverage form pays the amount that exceeds any other such insurance (whether collectable or not). If the other carrier denies coverage, this coverage form acts as though the other carrier paid and offers only the amount above what the other insurance should have paid. However, this coverage form does not pay more than the limit of insurance on the declarations (even when it is used as excess).
Example: Gayle has a package policy that includes property, inland marine, and general liability coverages. The property coverage form includes a $2,500 limit on valuable papers and records as additional coverage. One of the inland marine coverages Gayle purchases is valuable papers and records with a $25,000 limit. A covered valuable papers and records loss occurs. The inland marine coverage responds first for its $25,000 limit and the property additional coverage for valuable papers and records then responds with an additional $2,500 amount of insurance (if needed). |
H. POLICY PERIOD, COVERAGE TERRITORY
This condition explains the policy period and coverage territory. Both apply to all losses.
1. In order for coverage to apply, loss or damage must first occur:
• In the coverage territory
• During the policy period on the declarations
Example: Karen's policy period is 01/01/12 to 01/01/13. A small spark starts a fire in her business at 11:50 p.m. on 12/31/12. The fire smolders and nobody notices it until 2:00 a.m. on 01/01/13. Coverage applies because the fire started prior to the policy expiration date and time. |
2. Coverage Territory consists of (and is limited to) the United States of America, its territories and possessions, Puerto Rico, and Canada.
I. TRANSFER OF THE RIGHTS OF RECOVERY AGAINST OTHERS TO US
This condition provides the details of how the insured's rights of recovery against another party (including another insurance company), transfer to the insurance company once it pays the insured for loss or damage. This is sometimes referred to as subrogation.
If the insured (or any other covered party) has rights of recovery against another entity, those rights transfer to the company at the time it pays the insured or the covered party. The rights transferred apply only to the extent of the payment made.
The party that receives payment must do everything necessary to secure and protect the company's rights. This includes making sure that those rights are not impaired after a loss.
If the insured waives its rights of recovery against another party, the insurance company can refuse to pay its claim for loss or damage. This is not an absolute because the insured can waive its rights most of the time. However, such waivers must be in writing and be executed prior to any loss. The only really restricted time to waive rights is following a loss. However, they may still be waived if the party is:
• Covered by this insurance
• A business entity the named insured owns or controls
• An entity that owns or controls the named insured
• The named insured's tenant
Related Court Cases:
Mutual Subrogation Waiver Clause Barred Recovery By Property Owner's Insure
Subrogation Held Barred By Insurance Agreement Between Landlord And Tenant
Broad Subrogation Clause Waives All Of Insurer's Rights
Waiver Of Subrogation Applies To All Losses
CP 00 10–BUILDING AND PERSONAL PROPERTY COVERAGE FORM ANALYSIS
(February 2012)
E. LOSS CONDITIONS
These Loss Conditions apply in addition to IL 00 17–Common Policy Conditions and CP 00 90–Commercial Property Conditions.
Related Articles:
CP 00 90–Commercial Property Conditions Form Analysis
IL 00 17–Common Policy Conditions Analysis
1. Abandonment
The named insured still owns the property after a loss and is responsible for all expenses associated with it, unless or until the insurance company agrees to accept ownership of the property.
Example: A sinkhole causes the Montgomery Fashion Palace to tilt and slide off its foundation into the middle of Main Street, creating a major traffic obstruction. Montgomery informs its insurance company that it will accept a cash settlement and then close the business. However, the insurance company is not interested and refuses to accept the property. As a result, Montgomery must either moving the building back to its original position or arrange for its demolition. Montgomery is also responsible for all fines and penalties from the city for the traffic obstruction. |
2. Appraisal
The insurance company and the insured may occasionally disagree on the value of property or on the actual amount of loss. The appraisal condition is designed to solve this problem. In the first step, one of the parties decides it has reached an impasse with the other party and makes a written request for an appraisal. Each party then hires an independent appraiser. Each appraiser must be both competent and impartial.
Example: Jane is the insured and her insurance company is Bargun-Downe Property Company. They disagree on the value of the roof damaged by a lightning strike. They both agree to submit the dispute to appraisal. Jane selects an experienced appraiser who just happens to be her brother. Bargun-Downe selects a totally impartial party who does not have any appraisal credentials. Both appraisers are rejected. Jane's selection is biased and the company's selection is not qualified. |
The appraisers then choose an umpire. If they cannot agree on one, they can request that a judge of a court that has jurisdiction over the matter select one. Once all parties are selected and in place, each appraiser states the value of the property and the amount of loss. If both parties agree, the amount of loss is settled. Only disputed amounts are submitted to the umpire. Any decision made by any two of the three is binding on both the insurance company and the insured.
The expenses associated with this process fall outside the category of expenses the coverage form pays. The insured pays the following costs or expenses (and the company does not reimburse it for them):
• Its appraiser
• Its equal share of the cost of the umpire
• Its equal share of any other appraisal expenses
The insurance company pays the following costs and expenses. None of these expenses reduce the limit of insurance:
• Its appraiser
• Its equal share of the cost of the umpire
• Its equal share of any other appraisal expense
Example: A tornado seriously damages Baron's Furniture Store. Furniture is strewn over many city blocks. Sheila is the owner and believes the value of the loss is $560,000, based on inventory records. The Cheapskate Mutual claims representative visits the store, views both damaged and undamaged merchandise, and determines the loss to be $350,000. Each side presents its case to the other but the impasse cannot be resolved. Sheila has to restore the inventory and get back in business. She sends a letter to Cheapskate and requests an appraisal. Each party selects a qualified and impartial appraiser but cannot agree on an impartial umpire. They ask a local judge to select one and he does so. Sheila's appraiser determines the loss to be $625,000 but Cheapskate's appraiser determines a value of the loss of $450,000. The umpire reviews their figures and agrees with the insured on some items and with Cheapskate on others. The final settlement is $510,000. Each party bears its own expenses for the appraisers and umpire but the agreed value of the loss is $510,000. |
Related Court Case: Insurer Must Accept Decision Of Its Approved Umpire
3. Duties in the Event of Loss or Damage
The insured is expected to act reasonably immediately after a loss occurs. If not, the company's obligation to pay the loss may end. The named insured must:
• Notify the police or other law enforcement authorities if a law may have been broken. Even though this requirement may sound obvious, the circumstances surrounding a loss may make this issue more complicated than it appears.
Examples:
Scenario 1: A theft occurs at Paul's Camera Shop. Paul reports the loss to the insurance company. It begins to adjust the loss and discovers that a police report was not made. Paul explains that he suspects that a relative may be involved and doesn't want to get her in trouble.
Scenario 2: A fire destroys Jerry's warehouse. The insurance company adjuster discovers that a local gang may have started the fire. Jerry does not fill out a police report because of fear of reprisal. |
In cases like these, the insurance company has the right to refuse to pay the loss. It needs this requirement to protects its interests, which include being certain that the claim is legitimate as well as making sure there is a chance that the responsible parties are found and punished. When theft of property is involved, police involvement increases the chances that the property will be recovered.
• Give prompt notice to the insurance company of loss or damage and describe the property involved. This notice is not a complete and thorough report but instead provides enough information for the insurance company to begin to process the claim and decide how to respond. Some court cases have challenged the meaning of "prompt." As a result, the best advice is for the insured to send as much loss information to the insurance company as soon as it knows that a loss has occurred.
• Give a description of how, when, and where a loss occurred as soon as possible after it occurs. This requirement is slightly different than the prompt notification obligation. That obligation is to inform the insurance company on a timely basis that a loss has occurred. This obligation assists the company to determine if the loss is actually covered.
o HOW is what actually caused the loss. The answer determines if the loss is covered.
o WHEN is the exact time of the loss. Since coverage applies only if the loss occurs during the policy period, this information is very important. There is coverage if the loss occurs at 12:02 a.m. on the inception date. There is no coverage if it started at 11:59 p.m. the day before the inception date. In addition, accurate information on when the loss or damage occurred may help resolve whether the loss occurred suddenly or over a period of time. This is important. There is a distinction because sudden losses tend to be fortuitous and covered while losses that take place over a period time may be maintenance issues that are not covered.
o WHERE is important because most coverages require that the property be at a location or premises listed on the declarations. If the loss occurs elsewhere, the coverage form must be examined carefully to determine if any coverage applies at such locations.
• Take appropriate steps to protect the covered property from any further damage. The time to take that annual Florida vacation is never immediately after a loss occurs. The requirement to protect property involves taking reasonable measures, not extraordinary or unreasonable ones. Covering property with tarps to protect against moisture damage, boarding up windows, and hiring security guards are examples of reasonable measures to take after a loss. Any expenses the named insured incurs are taken into consideration in the loss adjustment and settlement but paying these expenses does not increase the limit of insurance. Finally, the named insured should separate the damaged property from undamaged property and set the damaged property aside for examination whenever possible.
Example: The front window of Haptown Appliances blows in during a violent thunderstorm. Flying glass, debris, and water badly damage the televisions on display. The police notify the owner and the owner informs his insurance agent and the insurance company. When the storm ends, the owner goes to the store and evaluates the situation. His immediate concern is that the security system no longer works. He purchases lumber, boards up the window and contacts the alarm company. The alarm company recommends a security company that can provide extra security until the window is repaired and the alarm system is put back into operation. After these arrangements are in place, the owner examines the appliances and moves the damaged ones to the rear of the store and begins to clean up. The insurance company includes the expenses for temporary security and boarding-up the window in the loss adjustment and settlement. |
• Provide inventories of damaged and undamaged property when the insurance company requests them. This includes quantities, costs, values, and the amount of loss claimed. This detailed information is important to properly adjust the loss and offer a fair settlement. The named insured controls the inventory and is responsible for supplying the information needed.
• The insurance company has the right to verify that the information the named insured provides is accurate and correct. For this reason, it may inspect the property in order to prove the loss or damage. It may also examine the insured's books and records that relate to the loss or damage. The insurance company can also take samples of the damaged and undamaged property and make copies of the insured's books and records.
This condition states that the insurance company must be reasonable in its requests. Since reasonable is not a defined term, the two parties might disagree about the intent of this condition. For example, the company may take the position that repeat visits are necessary in order to be thorough. The insured may view the same actions as being a delaying tactic that slows down the settlement. While the essence of this condition is to prevent the carrier from harassing the insured, it also benefits the insurance company. Because of the way it is written, an uncooperative insured cannot claim that a single visit is sufficient for the carrier to adjust and settle a loss.
Related Court Case: Uncooperative Insured Can't Seek Arbitration (Classic)
• Show good faith in the truth and accuracy of a claim for loss by providing the insurance company with a signed and sworn proof of loss. This must be done no later than 60 days after the company requests it, along with any other information needed. The insurance company provides the necessary forms and instructions on exactly the information it needs.
Note: If the company's requests are unclear and the insured is confused, any delay in providing the information cannot be used as an excuse to deny coverage.
• Cooperate with the insurance company in investigating and settling the claim.
In addition to the points outlined above, the insurance company has the right to examine any insured under oath. The examination can take place without another insured being present. The examinations can be done as often as necessary with respect to anything related to either the insurance coverage or the claim itself. They can include examinations of the insured's books and records. In all examinations, the written document used to record the insured's answers must be signed.
Related Court Case: Insured Fails To Produce Required Documents Following Fire Loss
Note: Loss investigation is a serious part of the insurance claims process. The insurance company must have complete access to information as necessary to investigate and settle the claim. This may include information the insured would rather not to disclose. Claims adjusters want to believe their insurance customers are honest but the sheer number of incidents of fraud makes them cautious. While the insurance company cannot use intimidation or harassment, it must still be diligent in order to protect its assets and to prevent or limit fraud.
4. Loss Payment
a. and b. The insurance company must use one of the four options below to settle a claim:
• Pay the value of the lost or damaged property.
• Pay the cost to repair or replace any lost or damaged property. This cost does not include any expense for increased cost due to enforcing any ordinance or law that regulates use, repair, or construction of any property.
• Take all or any part of the property at an agreed or appraised value.
• Pay to repair, rebuild, or replace the damaged property with property of similar type and quality. This payment does not include any expense for increased cost due to enforcing any ordinance or law that regulates use, repair, or construction of any property.
The value of damaged or destroyed property (or the cost to repair or replace) is based on the terms of the valuation condition of the coverage form (or any other provision that amends or replaces the valuation condition).
c. The insurance company must tell the insured the option it will use within 30 days after receiving a properly prepared and signed sworn proof of loss.
d. Insurance is meant to indemnify, not reward. As a result, the insurance company does not pay more than the insured's financial interest in the covered property at the time of loss.
Example: Mary and Jane form a partnership called Mary Jane's Clothing. Five years later, Mary purchases Jane's interest. A covered loss occurs two months after the purchase. Since Jane's name is still on the policy, she files a claim against the policy. She is politely informed that she has no right to make a claim and that the coverage form will not respond to her claim because she no longer has a financial interest in the covered property. |
e. The insurance company has the right to adjust claims for loss or damage to property the insured does not own directly with the property's owner but it may also allow the named insured to do so. The settlement must satisfy all claims for the property because the insurance company pays only once. In addition, the most paid is the property owner's financial interest in the property.
f. The insurance company that provides the property coverage may decide to defend the insured against suits due to claims brought by the property's owner. In such cases, it does so at its own expense.
g. The insurance company must pay the loss within 30 days of receiving the insured's signed and sworn proof of loss. This obligation depends on the insured meeting all policy conditions as well as the value of the loss being determined by one of the following:
• The parties having agreed on the amount of loss
• An appraisal award having been made
h. Buildings that abut one another often share a party wall. This wall separates the two buildings but is also part of each building. Loss settlements are not affected if the same insured owns all buildings. However, loss settlements may be more difficult if different insureds own the shared party wall. The 06 07 edition formally addresses this issue for the first time.
When both building owners plan to repair and rebuild, the insurance company pays its insured's proportional share of the damage to the party wall. However, the insurance company pays the full value of the party wall if the named insured wants to rebuild but the other building owner does not. It then has the right to subrogate against the adjoining building owner. (06 07 addition)
Example: Marsh's Restaurant is the middle building in a row of five buildings. Each shares a common wall with its neighbor. A fire starts at Marsh's and travels to both its neighbors. The loss is substantial. Marsh's is determined to rebuild but the neighbor on the south is not. Marsh's insurance company works with the northern neighbor and both pay their share of the party wall but Marsh pays the full amount for the southern wall and then subrogates against the southern neighbor for its share of that wall. |
5. Recovered Property
Either the named insured or the insurance company may recover property after a loss is paid. In that case, the recovering party must promptly notify the other and inform it of the recovery. The named insured has the right to decide whether to return the claim payment and keep the recovered property or allow the insurance company to keep the recovered property. The insurance company is responsible for recovery expenses and any repair to the recovered property, subject to the limit of insurance.
Example: Burglars break into Floyd's Music Shop and steal $25,000 in CDs. The insurance company pays the claimed amount of $25,000. Two years later, the police notify Floyd that the CDs have been located at a warehouse. Floyd notifies the insurance company of this development. The insurance company representative and Floyd visit the warehouse and Floyd realizes that the current value of the CDs is negligible due to their age. He decides to keep the claim payment and let the insurance company keep the CDs. |
6. Vacancy
Insurance companies are interested in insuring successful and ongoing businesses. Risk pricing contemplates an active occupancy. As a result, rates on vacant properties are heavily surcharged. Since vacancy is often discovered only after a loss occurs, the loss conditions dramatically limit coverage if the insurance company was not informed of the vacancy in advance.
This condition has harsh penalties. As a result, it is very important to understand the definition of vacancy and that the definition depends on whether the insured is a tenant or a building owner. If the named insured is a tenant, the only part of the building considered when analyzing vacancy is the portion it occupies. That portion is considered vacant if the business personal property on premises is not sufficient for the tenant to conduct its customary operations.
Example: Millie's Florist Shop occupies a quarter of the Landow building. The tenant that previously occupied the rest of the building, The Cat and Mouse Café, moved out. The building owner is looking for a new tenant and the search is now in its ninth month. A fire breaks out in the vacant portion of the building and Millie's space experiences heavy smoke damage. This condition does not affect Millie's loss because the portion of the building she occupies is not considered vacant. |
If the named insured is the building owner (or a general lessee), the entire building is considered in determining vacancy. The building is vacant unless at least 31% of the total square foot area is:
• Rented to a lessee or sub-lessee that uses it to conduct its customary operations
• Used by the building owner to conduct customary operations. The key word is customary.
Example: If the lessee, sub-lessee, or building owner is a retail business, the retail business is its customary operation. The insurance company may deny a claim when a loss occurs and it discovers that 90% of the building is used for storage, because the building is vacant according to the coverage form's language. |
Buildings under construction or being renovated are not considered vacant. Questions could arise as to how long a project can be considered under construction and under renovation. If a building is being renovated but the renovation involves only the owner working on the building in his spare time (because he knows there are no tenants interested in it), how long will it be before that building is considered vacant?
Example: The Eastward Shopping Center has four separate buildings and always struggles with vacancy issues. Building A is totally occupied by one tenant. Building B has one shop that occupies 20% of the space. The rest of the building has been vacant more than six months. Building C has multiple tenants but is 15% vacant. Building D has just been leased subject to completion of major remodeling. A contract has been signed and remodeling has begun.
A major summer storm's heavy winds damage all four buildings. Based on the definition of vacancy, Buildings A and C are not vacant and their coverage is not affected. Building B is vacant and is subject to a vacancy penalty. Building D is not vacant at the time of the loss (and the vacancy penalty is not applied) because it is being remodeled. |
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Having defined vacancy, the vacancy condition can be stated. If the building damaged by a covered cause of loss has been vacant (as defined above) more than 60 consecutive days before the date of loss:
• The insurance company does not pay anything if the loss is caused by vandalism, breakage of building glass, water damage, theft, or attempted theft. It also does not pay for sprinkler leakage damage if the sprinkler system is not protected against freezing.
• The insurance company reduces the amount of any loss it pays by 15% if the claim is caused by or results from any covered cause of loss not listed above.
Example: Building B in the Eastward Shopping Center example above was penalized 15% because the loss was caused by storm damage. The loss would have been denied if it had been caused by vandalism. |
Related Court Case: Vacancy Exclusion Held Applicable When Building Was Devoid Of Substantial Warehouse Contents
Related Article: Vacancy
7. Valuation
The value of covered property at the time of covered loss or damage is determined as follows:
a. Actual cash value at the time of loss except as described below. The coverage form does not define actual cash value but court decisions refer to it as replacement cost new minus accumulated depreciation.
Note: Section G. Optional Coverage Item 3. replaces actual cash value valuation with replacement cost valuation.
Example: Listings, Inc. has a small fire that produces considerable smoke. It provides a complete inventory along with purchase prices for all items damaged. The claims adjuster then develops the current replacement cost new for those items and applies a depreciation factor to that replacement cost new in order to develop each item's actual cash value.
Item Description |
Item Age |
Purchase Price |
Replacement cost new |
Depreciation factor |
Actual Cash Value |
|
|
Office furniture |
2 years |
$6,000 |
$7,500 |
.80 |
$6,000 |
|
|
Computers |
5 years |
$15,000 |
$9,000 |
.50 |
$4,500 |
|
|
Carpet |
5 years |
$20,000 |
$25,000 |
.70 |
$17,500 |
|
|
Window Coverings |
2 years |
$10,000 |
$12,000 |
.90 |
$10,800 |
|
|
Total Value |
|
|
$53,500 |
|
$38,800 |
|
|
The maximum loss payment using actual cash value valuation is $38,800. If the replacement cost option had been selected, a maximum payment of $53,500 would have been available. |
b. The insurance company pays the building loss at full replacement cost value if the building limit of insurance meets the requirements of the Additional Condition–Coinsurance and the cost to repair or replace it is $2,500 or less. This is a bonus to the insured for carrying a limit of insurance that satisfies the coinsurance requirement.
This cost does not include any increased costs due to enforcing any ordinance or law that affects construction or use.
This item has exceptions. The following property is still valued at its actual cash value, whether or not it is attached to the building.
• Awnings
• Floor coverings
• Refrigerating, ventilating, cooking, dishwashing, or laundering appliances
• Outdoor equipment
• Outdoor furniture
c. Stock sold but not delivered is valued at its net selling price less discounts and expenses the insured would have had otherwise.
Example: Ben's Wholesale stocks only merchandise it has sold. A covered loss destroys all the stock. The merchandise was sold at an agreed price of $600,000. Ben provides a 10% 30-day payment discount and it costs $50,000 to transport the merchandise to the customer. The value of Ben's loss is $600,000 minus the 10% discount of $60,000 and minus transportation costs of $50,000, for a total of $490,000. |
d. Damaged glass that laws require be replaced with safety glass is replaced with safety glass (even if the damaged glass was not safety glass).
e. Tenants' improvements and betterments is unique because the tenant purchases, owns, and uses them but cannot legally exercise its ownership right to remove them when the rental or lease ends and it moves out. One of the following three valuation methods is used that are based on actions of the insured or the landlord:
• Actual cash value is used to determine the amount of loss if the insured repairs or replaces the improvements or betterments.
• A cash settlement based on the proportional value of the items is determined if the insured does not promptly repair or replace the improvements and betterments. The proportion is determined as follows:
Step 1: Determine the number of days from the date of loss to the lease's expiration date. The expiration date is considered the end of the renewal option period, if there is one.
Step 2: Determine the number of days from the date the improvements and betterments were installed to the lease's expiration date. The expiration date is considered the end of the renewal option period, if there is one.
Step 3: Multiply the original cost of the improvements and betterments by step one.
Step 4: Divide step three by step two.
Example: Sally's Card Shop added $5,000 in improvements when it moved in two years ago. The five-year lease includes a five-year renewal option. Lightning damages the improvements and they must all be replaced. Sally is not sure that the improvements are really needed at this time, so the proportion must be calculated in order to pay the loss.
Step 1: Date of loss is 01/01/12. Date of lease is 01/01/10-12/31/15 with option to 12/31/20. The number of days from 01/01/12 to 12/31/20 is 2,920.
Step 2: The lease inception is 01/01/10 and lease with renewal option is 12/31/20. The total number of days is 3,650.
Step 3: $5,000 X 2,920 = $14,600,000
Step 4: 14,600,000/3,650 = $4,000
Sally receives $4,000 based on this proportional method. |
• The insured does not receive anything if another party (such as the landlord) repairs the improvements or betterments.
Related Articles:
Improvements And Betterments
CP 04 38–Functional Building Valuation
F. ADDITIONAL CONDITIONS
These two additional conditions are extremely important. Mistakes in either can be extremely costly.
1. Coinsurance
This condition applies only if there is a coinsurance percentage on the declarations. The insurance company does not pay the full amount of any loss if the value of the covered property at the time of loss multiplied by the coinsurance percentage on the declarations exceeds the property's limit of insurance.
It is important to understand that coinsurance is not required or mandatory. However, it is recommended because pricing is surcharged significantly when coinsurance is not selected. The lower premium is provided on the condition that the insured maintain a limit of insurance equal to the selected 80%, 90%, or 100% of the value of the covered property. If it does not, a coinsurance penalty is applied to any loss sustained.
The coinsurance penalty is calculated as follows:
Note: The insured can select the Agreed Value option and not be subject to coinsurance or the coinsurance penalty. This option is analyzed in G. Optional Coverages.
Step 1. Determine the value of the covered property at the time of loss. The value of the property as of the policy inception date is irrelevant.
Example: Keith's Shoe Barn has coverage on its stock and other business personal property. The total value is $100,000 on the inception date. Keith decides to use 80% coinsurance and purchases coverage with an $80,000 limit. A fire occurs three months into the policy period. At the time of loss, the total value of stock and other business personal property is $120,000 because Keith purchased a large amount of stock in advance of back-to-school shopping. The loss is valued at $50,000. The value used to determine the coinsurance penalty is $120,000, the value at the time of loss, and not the $100,000 value on the inception date. |
Step 2. Multiply Step 1. by the coinsurance percentage on the declarations. There is no penalty if the result is greater than the limit of insurance. However, if the result is less than the limit of insurance, go to step 3.
Options available are 80%, 90%, 100%, or none (in some cases). The premium is surcharged if the no coinsurance option is selected. Property rates are developed assuming 80% coinsurance and are not surcharged or credited. Limits that reflect 90% coinsurance are credited 5% and those that reflect 100% coinsurance are credited 10%.
The limit of insurance does not have to be the value multiplied by the coinsurance. It should be based on (and reflect) the maximum value expected during the policy period. If fluctuating values are expected, the insured should consider writing coverage on a reporting form or using the peak season endorsement.
Related Articles:
Value Reporting Form
Peak Season Coverage
In some cases, the insured may choose to insure at 100% value of the property but keep the coinsurance at 80% or 90% so the limit is adequate in case of unanticipated value increases and to avoid a coinsurance penalty.
Example: Because the value of the property at the time of loss is $120,000, Keith's Shoe Barn's limit should have been $96,000. Keith chose 80% but applied it to the value of $100,000 as of the inception date and now faces a coinsurance penalty because the limit is only $80,000. |
Step 3. Divide the limit on the declarations by Step 2 to develop the coinsurance penalty factor.
Step 4. Before applying the deductible, multiply the loss amount by Step 3.
Step 5. Subtract the deductible from step 4.
The insurance company pays the lesser of the amount determined in Step 5.or the limit of insurance. The named insured pays any difference.
Example: Keith's Shoe Barn's loss amount with a coinsurance penalty is determined as follows:
Step 1: The value is $120,000
Step 2: $120,000 X .80% = $96,000.
Step 3: $80,000 / $96,000 = .833
Step 4: $50,000 X .833 = $ 41,650.
Step 5: $41,650 – the $1,000 deductible = $40,650.
The insurance company pays $40,650. The remaining $9,350 is not covered and Keith must pay it from his funds. |
The coverage form includes three useful examples that explain how the coinsurance condition applies. The coinsurance condition may be suspended by selecting the Optional Coverages–Agreed Value option. Refer to Section G. Optional Coverages for a more detailed analysis of this optional coverage.
Related Article: Coinsurance Clause
2. Mortgageholders
Mortgageholder is not defined but it includes trustees in this coverage form. The insurance company pays for covered loss or damage to buildings or structures to each listed mortageholder in the order of precedence and as its respective interest appears. The mortgageholder must prove its interest at the time of loss.
The mortageholder retains the right to receive loss payments even when foreclosure proceedings or similar actions begin against the insured. However, it loses those rights after the foreclosure is complete since the named insured no longer has any interest in the property. At that point, the bank is the owner and its policy should respond.
If the insured's claim is denied because of its actions (or because it failed to comply with any of the policy's terms and conditions), the mortageholder still has the right to receive loss payments (but only if it has done all of the following, as applicable):
• Paid any premium due when the insurance company notified it that the insured had not done so
• Submitted a signed, sworn proof of loss within 60 days after the insurance company notified it that the insured had not done so
• Notified the insurance company of any change it knows of in ownership, occupancy, or substantial change in risk
Example: Gravyboat LLC buys and sells homes. It owns 35 homes when the sub-prime bubble crunch hits. Gravyboat is overextended and cannot sell a number of houses. The mortgageholder, Bank Three, begins foreclosure proceedings on five properties. Gravyboat does not pay the premium and CloseEnuf insurance company sends a notice of cancellation. Bank Three receives the notice and pays the premium but does not tell CloseEnuf that Millicent, LLC actually owned two of the properties. When one of the Millicent properties is damaged by fire, CloseEnuf denies the loss because Bank Three had not informed it that the ownership had changed. |
Once the mortgageholder takes such intervening action, the terms of the coverage form apply to the mortgageholder because it assumed the named insured's position.
If the insurance company pays the mortgageholder for a covered loss or damage but refuses to pay the insured because of its actions (or because it did not comply with the terms and conditions of the coverage form):
• The mortageholder's rights under the mortgage transfer to the insurance company to the extent of the amount paid.
• The mortgageholder's right to recover the full amount of its claim is not impaired.
The insurance company has the option to pay off the entire mortgage (including accrued interest). If it does so, it owns the mortgage and the insured must pay the remaining mortgage debt to the insurance company.
If the insurance company cancels the policy for non-payment of premium, it must give at least 10 days prior written notice to the mortgageholder before the cancellation takes effect. It must give at least 30 days written notice to the mortgageholder for any other reason.
If the insurance company decides to not renew the policy, it must give at least 10 days written notice to the mortgageholder prior to the expiration date.
Related Court Case: Payment Of Policy Proceeds To Insured Did Not Relieve Insurer Of Obligation To Mortgagee
